Former President Donald Trump has proposed a tariff plan, which includes imposing 60% tariffs on imports from China and 10% tariffs on imports from the rest of the world. According to Bloomberg Economics, implementing such tariffs would likely lead to inflation exceeding the Federal Reserve’s target and could prompt the central bank to raise interest rates. Bloomberg Economics utilized a model to estimate the impact of Trump’s tariff plan on the U.S. economy. The model suggests that implementing the proposed tariffs would negatively affect U.S. economic growth and increase the cost of living for Americans. Specifically, it projects that the core personal consumption expenditures price index, the Fed’s preferred measure of inflation, could rise to 3.7% by the end of the following year, well above the 2% target. Economists surveyed by Bloomberg, on average, expect 2.1% inflation in 2025.
According to the model, Trump’s tariffs would result in consumer prices being 2.5% higher and gross domestic product (GDP) being 0.5% lower after two years. This situation could force the Fed to decide between raising interest rates to combat inflation or cutting them to stimulate economic growth.
However, there is uncertainty surrounding these projections. Tom Orlik, chief economist and one of the report’s authors, acknowledges the difficulty in forecasting the impact due to various variables and the lack of recent precedent for tariffs at such high levels. Nonetheless, he suggests that significant tariffs could have a substantial impact, emphasizing the associated risks.
Regarding Trump’s previous trade war with China during his first term, a study by the U.S. International Trade Commission found limited inflationary effects from the tariffs imposed on Chinese goods. But Trump’s current tariff proposal is broader in scope compared to his previous actions, which included tariffs of up to 25% on Chinese goods. Get more policy updates and potential market impacts with a Pro Farmer subscription, sign up online.
